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Reform is impossible when the reformers are losing so much

Xi, Wen and Dai fail to make much progress in economic liberalisation since it's their families who benefit most from the existing system

Tom Holland

BIO

As the writer of the South China Morning Post’s Monitor column, Tom Holland attempts each day to make sense of the latest developments in business, finance and economic affairs in Hong Kong and mainland China.

China's incoming President Xi Jinping, outgoing premier Wen Jiabao and former central bank governor Dai Xianglong have a couple of things in common.

Over the past few months, all three have been embarrassed by articles in the international media detailing the vast fortunes amassed by family members during their periods in high office.

The extent of Xi's family business interests were exposed last summer in a 4,000-word investigation published by Bloomberg.

From rare-earth minerals and energy investments, through telecommunications and power equipment, to infrastructure construction and property development, Bloomberg detailed a multibillion-yuan business empire built up by Xi's siblings, his in-laws and their children.

Then in October, The New York Times examined the holdings of Wen's family members, concluding that close relations of the premier had accumulated assets worth up to 17 billion yuan (HK$21.13 billion) in businesses ranging from gem trading through private equity to insurance.

And earlier this week, the Times published an article alleging that relatives of central bank governor and chief financial regulator Dai had made a fortune buying millions of shares in state-controlled life insurer Ping An ahead of its 2004 flotation at a deep discount to their issue price.

But relatives who appear to have been making the most of their exalted political connections to line their pockets are not the only thing that Xi, Wen and Dai have in common.

When they attained high office, all three men enjoyed reputations as keen supporters of economic liberalisation.

Already Xi, who will be anointed China's new president in March, has pledged to crack down on corruption and ordered officials to cut down on their displays of ostentation. And just yesterday, he was vowing to press ahead with further economic reforms.

His avowed enthusiasm for reform recalls the early days of Wen's term in office, when the outgoing premier was also portrayed as both a man of the people and an ardent proponent of liberalisation.

Similarly, when he was at the central bank between 1995 and 2002, governor Dai was also regarded as a standard bearer for financial reform. He repeatedly promised to open the country's banking system to foreign institutions and in 2000 he even hinted that the yuan would be made fully convertible within five years.

Yet both Wen and Dai failed to deliver on their early promises of reform.

Critics say that the only significant reform achieved by Wen during his 10-year premiership was the abolition of China's hated agricultural tax. And even that backfired when local authorities, stripped of one of their main sources of revenue, launched a massive series of illegal land seizures to pad out their incomes.

Dai, too, found reforms hard to push through. More than 10 years after his term as central bank governor, the market share of foreign banks in China is tiny, and the yuan's convertibility remains tightly restricted by capital controls.

The reason for their lack of progress isn't hard to fathom. As the investigations by Bloomberg and The New York Times make clear, it is precisely the families of those senior officials responsible for implementing reform who benefit most from the existing system.

Typically, the relatives of China's leaders make their money in sectors regarded by Beijing as strategic and that are tightly controlled by the state.

Some use their influence to obtain cheap funds from the state-controlled banking sector, which they then use to acquire prime plots of building land from their local government owners.

Others trade on their connections to land lucrative contracts to supply expensive equipment to state-controlled telecommunications, oil or electricity companies.

Crucial reforms like liberalisation in the banking sector, the dismantling of state monopolies and the opening of protected business sectors to free and transparent competition might benefit the economy as a whole, but they would also jeopardise the ability of the leadership's families to enrich themselves from the status quo.

That makes real reform all but impossible. Alas, if even the relatives of officials at the central bank - long regarded as the headquarters of China's reformist faction - are profiting so handsomely from the current system, the prospects for meaningful economic liberalisation look little better under Xi's incoming presidency than under the disappointing premiership of Wen.